With healthcare currently featuring in Lumin’s investment solutions, the team reflects on why we hold it: the investment case and the factors behind its strong performance so far.
With the Christmas period almost here, the winter sniffles are definitely running riot within the Lumin Investment team. Rumour has it that the local convenience stores have run out of Lemsip. Coincidentally, the first edition of the Sector Spotlight series explores the team’s investment in the healthcare industry.
Why healthcare?
The healthcare sector has been underappreciated for almost two whole decades. The chart below paints the picture clearly, where a value beneath 0% indicates the sector is trading at a ‘discount’ to long-term broad market valuations. But, are these discounts unfair and is there an opportunity being overlooked?
Healthcare characteristics
Several persistent factors are driving healthcare’s long-term growth story. We saw this as a potential entry point and proceeded to conduct extensive research into the sector. The Sector Spotlight will now focus on the areas uncovered.
Innovation
A key driver for the industry is innovation and the use of AI. Drug approval is a required step for profitability – following high research and development spending – and the advancement of innovation is increasing the number of drug approvals (see below).
AI is creating an industry-wide tailwind for the firms. According to a recent study by Nvidia, 46% of biotech and pharmaceutical respondents stated they’ve achieved a positive return on investment (ROI) from AI-driven drug development.
Therapeutics is a leading example of innovation driving profits, where new advancements in gene therapy are promising to treat over 7,000 diseases, 95% of which have no available treatment. This opens up a new revenue stream for healthcare companies – something that was previously unavailable. Furthermore, medical technology is rapidly improving, with robotic surgeries proving they can deliver higher accuracy than the human hand, all whilst reducing recovery time.
Demographics
The ageing population plays into the thesis, with 1 in 6 projected to be over 65 by 2050.
Importantly, over 65s spend three times more on healthcare than their younger counterparts. As populations become older on average, with the median age now being 31 compared to 28 only a decade ago, future demand will consequently grow.
Additionally, emerging markets are expected to trigger demand. India and China represent c. 1/3 of the global population and underspend on healthcare as a proportion of GDP. Respectively, they spend 3.5% and 6%, compared to the US which spends over 17%.
Even at home, the UK has room to increase spending which is currently 11% of GDP. Small increases, in relative terms, could have an outsized impact on the industry and returns of the underlying companies.
Winners vs losers
Healthcare has the largest disparity between winners and losers, with ‘winners’ outperforming ‘losers’ by around 300% over a 10-year period. The reason for this is the patents, which provide exclusivity of distribution of the drug, which in turn, supercharges returns. Due to the disparity in outcomes of individual firms, it’s vital to take an active approach to investing in this sector, rather than opting for a passive approach.
Defensive nature
Healthcare is considered one of the most defensive sectors in the market. Significant government funding helps ensure research and development of new drugs and treatments continue to develop. On top of this, with insurers typically footing bills rather than the end user, the demand stays the same regardless of the price. The sector typically has a correlation of under 1 with the wider market, translating into the sector dropping by less than the wider market does when equities sell off. This facilitates the preservation of capital in a downward trending market.
Mergers & acquisitions (M&A)
Due to the patent cliff nature of the industry, firms can see significant drops in revenue when said patent expires. In turn, many firms turn to mergers and acquisitions to continue fueling growth, with healthcare firms said to have $1.2tn of capital allocated to deal making. The firms have already been utilising this, highlighted by more than trebling M&A deal value in 2025, in comparison to the previous year.
Valuation
As the above chart shows, the sector was trading at a large discount to historic averages. A large driver behind this was US political pressure, which we believe spurred the market on to an irrational sell off. The flow of capital to ‘risk on’ sectors like technology/AI will also have starved the industry from investment flows, given its defensive nature. Despite this, the sector still has very strong long-term earnings growth, as the chart below reveals.
Goldman Sachs have identified health care as a leading candidate for the next leg of the AI investment story. This is of no surprise to us due to the clear opportunities, not least highlighted by AI health diagnostics and imaging roll-out in the UK being expected to create the capacity of 2,000 GPs by the end of 2027.
Research process
With the investment thesis appearing strong, that’s when the real work began. 31 funds were uncovered by the team’s quant screen, which applies various filters in order to narrow the search down to just a few relevant options. Beyond this, qualitative research was conducted and a shortlist was interviewed, before the recommended fund was pitched to Lumin’s Investment Committee.
Following the robust process, the team decided to invest in an actively managed healthcare fund called Janus Henderson Global Life Sciences. The fund’s team has deep expertise with specialists from the sector on desk. Three team members are PhD holders, and the team has over 125 years of combined healthcare experience. The fund, whilst focusing on just one broad sector, still maintains diversification on a regional basis, market cap basis and sub-sector basis.
On top of this, the fund brings a long-term track record of outperformance relative to its benchmark. Whilst it was added to the Core model, passive equivalents were chosen for the passive solutions, whilst it was not included in the income solutions due to the low yield.
Performance
One year on from investment in Q4 2025, the fund has had strong returns and generated over 27%, outperforming the benchmark by 2%. Additionally, the fund has delivered over double the performance of global equities, as shown below.
The Investment Team continues to monitor all aspects of our solutions; the flows, performance, portfolio changes, team changes, sector conviction, macroeconomic changes and continue to meet each held fund manager every 6-12 months. Additionally, new funds are always being reviewed which could help improve client risk-adjusted performance.
